The Iranian Threat To World Oil Remains

Forbes

21 hours ago

Iran's supreme leader Ayatollah Ali Khamenei speaks after casting his ballot during the runoff ... More presidential election in Tehran on July 5, 2024. P (Photo by ATTA KENARE / AFP) (Photo by ATTA KENARE/AFP via Getty Images) AFP via Getty Images
After the U.S. bombing of Iranian nuclear facilities, there was arguably a security (or insecurity) premium on oil of about $10 per barrel. There were numerous scenarios of how threats to oil supplies might develop, ranging from drone attacks on oil shipping in the Arabian/Persian Gulf to an Israeli or American attack on Iran's oil export terminal, with a massive Iranian attack on Saudi oil fields being the worst-case scenario. Instead, the best-case scenario developed: an Iranian attack on a U.S. base in Qatar, done in a manner to minimize casualties, which suggested they wanted to de-escalate.
But will this prove to be a one-and-done? Israel was slow to accept a cease-fire but now seems satisfied that Iran's nuclear program has been badly damaged and President Trump has declared Iranian nuclear facilities to be 'obliterated.' While there are dissenting voices, both countries appear satisfied and unlikely to take further military operations—for now.
But just as Western intelligence has been less than unanimous about the military operation's efficacy, so statements from Iranian leaders have been contradictory. Any given comment could be self-serving: declare the operation a success to deter further attacks or declare it a failure to appease a domestic audience. But certainty is not advanced by their remarks.
With asymmetric conflicts, it is always good to recall the Bluto Blutarsky rule from the movie Animal House : It ain't over until we say it's over. Given the significant presence of militants in the Iranian regime, it is premature to say they will not pursue further action. There are two particular paths that threaten severe consequences for the oil market and the global economy.
First, the government (or some bodies therein) could pursue asymmetric warfare. Instead of publicly launching missiles, cyberattacks, sabotage, terrorism and/or assassinations could be attempted in the hope that they would be sufficiently deniable that the U.S. and/or Israel would not respond. Yet leaders of those two nations seem unlikely to refuse to retaliate because of incomplete evidence. Not only that, but there might be other actors like Al Qaeda that want to see Iran punished and so undertake covert actions hoping that Iran will be blamed.
Which would put us back in the pre-bombing situation, with concerns that military escalation would include attacks on oil shipping or facilities. It would be nice to think that Netanyahu would restrain from attacking Iranian oil facilities, given that it would damage his allies, but the Israeli leader is hardly known for restraint. The U.S. Navy, on the other hand, would probably be tasked with taking out Iranian military targets and maybe even its leadership rather than the oil infrastructure.
As discussed ad nauseum Iran could disrupt shipping in the Arabian/Persian Gulf, but only partly and only for a brief period. Swarms of drones and missiles could do enough damage to enough tankers to discourage many companies from risking their ships. The effects would resemble the supply chain problems caused by the pandemic: volatile quantities and uncertainty could trigger hoarding and would raise prices above $100 if the attacks are fairly successful.
But there is another response that Iran might take. A number of analysts have pointed out that the country probably regrets not building and testing a nuclear weapon, that is, following the path of N. Korea instead of Libya's Gaddafi. Nuclear weapons are considered a deterrent and for vulnerable countries like Iran have a lot of appeal.
Whether Iran is weeks, months or years away from being able to test a weapon after the damage inflicted on its program is not the operative question. The overarching issue concerns the response to such a test by the U.S. and Israel. Best case scenario would be if the test made Iran fell secure enough to rejoin the community of nations as a peaceful player, instead of being a revolutionary actor. They might very well do that, but it is hardly likely that either President Trump or Prime Minister Netanyahu would assume such to be the case, regardless of promises from the Iranian regime.
The implication is that further military action would be undertaken, at the very least a new campaign of bombing and/or assassination. In this case, the potential for oil shipping and/or facilities to be attacked by one or both sides is revived, by one or both sides of the conflict. During the Iran-Iraq War, one editorial cartoonist portrayed the two antagonists astride an oil barrel, each stabbing his end and shouting, 'Take that!' The U.S. especially seems unlikely to want to use the 'oil weapon' against Iran: it would deny them revenue but simultaneously hurt the global economy. Still, the President might see that as a fifth-dimension chess move that would pay off in the long run.
On the other hand, shutting down Iran's oil exports, now about 1.5 million barrels per day, could be offset by either increased Saudi production and/or releases from strategic inventories. For their part, the Saudis might prefer not to antagonize the Iranian regime given the recent rapprochement between the two or out a desire to avoid antagonizing a nuclear-armed neighbor. Strategic stocks in IEA countries could easily offset the loss of Iranian exports for many months, but consumer governments have a long history of withholding supplies during a crisis, fearing a worsening of the shortage or being unconcerned about higher prices.
Energy security analysts have long considered an Iranian attack on the giant Saudi oil processing at Abqaiq to be the biggest threat, but the relative failure of the 2019 missile and drone attack on that facility has allayed those fears. Yet since then, Iranian capabilities have advanced, suggesting it should be newly considered as a threat. Certainly, if the regime believes its existence to be at issue, an extreme action cannot be ruled out.
Paul Erdman's famous book Crash of '79 posited a nuclear attack on the Saudi oil fields by the Shah of Iran and a successful test of a nuclear device could kindle fears of just that doomsday scenario, particularly if the response to the test is a massive military attack with the goal of overthrowing the Iranian government. Even if such doesn't occur, as long as Iran remains in something close to a state of war with Israel and the U.S., even a slight possibility that it would happen will impose a security premium on oil.
Many are hoping that Iran's weakness will continue to encourage them to moderate their behavior, rein in their proxies and give up their nuclear weapon ambitions. Unfortunately, the history of foreign policy and military mistakes shows the folly of assuming one's opponents will behave as desired. Without a major change in the Iranian regime, there remains a significant potential for future threats to oil supplies from the various parties involved. And should the Iranian regime appear threatened, we could see a repeat of Saddam Hussein's destruction of oil fields in Kuwait (successful) and Iraq (unsuccessful). At any rate, complacency about energy security would appear to be shortsighted.